Arbitrage opportunities discovery in Thailand's spot and futures market: pair trading strategy from threshold co-integration model.

Abstract

This study examines the 5-minutes intraday price relationship between pairs of assets in Thailand’s Stock Spot (SET) and Futures (TFEX) Markets. Three pairs of series of the same underlying asset (SET50, KTB, TRUE) which trade between 2nd July, 2014 to 29th August, 2014 are studied. The study finds long-run relationship and short-run dynamic of the prices of pairs. Considering the existence of the transaction cost in practical trading, the price relationship is estimated following the Threshold Vector Error Correction Model (TVECM). The TVECM pair trading strategy is formulated using the estimated parameters. Applying the formulated strategy, the arbitrage opportunities are found. The performance of the TVECM pair trading strategy is superior to the traditional pair trading strategy.

KEY WORDS: Threshold Co-integration / Pair Trading / Market Neutral / Statistical Arbitrage / Spot and Future